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                <b>Scroll down to complete all parts of this task.</b><br/><br/>
                Kaci Smith is a senior accountant with Brown and Jones, LLP, a public accounting firm. &nbsp;She has been asked by Connie Brown, a partner at the firm, to determine the amounts that would be reported on the balance sheet of a client, Rosemeade Corporation, after Rosemeade purchased the stock of two corporations on December 31, Year 1. &nbsp;The attached letter from Rosemeade to Connie provides more detail on the acquisitions. &nbsp;The specific line items for which Kaci has been asked to determine the amounts to be reported on Rosemeade's December 31, Year 1, balance sheet are as follows:
                <ul style="margin-left:80px"><br/>
                    <li>Inventory</li><br/>
                    <li>Investment in subsidiary ("Investment in S")</li><br/>
                    <li>Goodwill</li><br/>
                    <li>Noncontrolling interest</li><br/>
                    <li>Retained earnings</li><br/>
                </ul>
                Kaci has prepared the following memo indicating the amounts she determined should be reported for the line items in question. &nbsp;Kaci based all her computations on the December 31, Year 1, balance sheets provided by Rosemeade and the two companies in which Rosemeade acquired stock, Evers Inc. and Chance Company. &nbsp;These balance sheets can be found on the Exhibits tab. &nbsp;To revise the memo, click on each segment of underlined text below and select the needed correction, if any, from the list provided. &nbsp;If the underlined text is already correct in the context of the document, select [Original text] from the list.

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                    <u>Memo reporting amounts to be included on Rosemeade's balance sheet for December 31, Year 1</u></p>
                </div>
                &nbsp;<br>
                &nbsp;<br>
                To: Connie Brown<br>
                From: Kaci Smith<br>
                Re: Rosemeade's December 31, Year 1, consolidated balance sheet<br>
                <br>
                Summarized below are the amounts to be reported for the line items in question on Rosemeade's December 31, Year 1, balance sheet. &nbsp;I believe that everything has been properly computed but, if not, I am happy to correct any mistakes I have made.<br>
                <br>
                <u>Summary of amounts to be reported on Rosemeade's December 31, Year 1, balance sheet</u><br>
                &nbsp;<br>
                Inventory:<br>
                The amount reported for inventory should be <span class="parent mbg far {if condition='isset($log.1)'}xbg{/if}">$10,600,000 because Rosemeade will consolidate Chance and will report the investment in Evers using the equity method.</span>
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                                <input type="radio" name="topic_t[1]" value="1" {if condition='isset($log.1) && $log.1.topic_v eq 1'}checked{/if} title="<em>[Original text]</em> <em class='span'> $10,600,000 because Rosemeade will consolidate Chance and will report the investment in Evers using the equity method.</span>" ><br/>
                                    <input type="radio" name="topic_t[1]" value="2" {if condition='isset($log.1) && $log.1.topic_v eq 2'}checked{/if} title="<em class='span'>$6,000,000 because Rosemeade will report the investment in Chance using the equity method and will account for the investment in Evers at fair value.</em>"><br/>
                                    <input type="radio" name="topic_t[1]" value="3" {if condition='isset($log.1) && $log.1.topic_v eq 3'}checked{/if} title="<em class='span'>$7,200,000 because Rosemeade will consolidate Evers and will report the investment in Chance using the equity method.</span>" ><br/>
                                        <input type="radio" name="topic_t[1]" value="4" {if condition='isset($log.1) && $log.1.topic_v eq 4'}checked{/if} title="<em class='span'>$10,000,000 because Rosemeade will consolidate Chance and will report the investment in Evers using the equity method.</span>"><br/>
                                            <input type="radio" name="topic_t[1]" value="5" {if condition='isset($log.1) && $log.1.topic_v eq 5'}checked{/if} title="<em class='span'>$12,600,000 because Rosemeade will consolidate Chance and will report the investment in Evers using the equity method.</span>" ><br/>
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                                                &nbsp;<br>
                                                Investment in S:<br>
                                                The amount reported for investment in S should be <span class="parent mbg far {if condition='isset($log.2)'}xbg{/if}">$0 because the investment in S is eliminated upon consolidation.</span>
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                                                                <input type="radio" name="topic_t[2]" value="1" {if condition='isset($log.2) && $log.2.topic_v eq 1'}checked{/if} title="<em>[Original text]</em> <em class='span'> $0 because the investment in S is eliminated upon consolidation.</em>" ><br/>
                                                                    <input type="radio" name="topic_t[2]" value="2" {if condition='isset($log.2) && $log.2.topic_v eq 2'}checked{/if} title="<em class='span'>$2,000,000 to reflect the investment in Evers only.</em>"><br/>
                                                                    <input type="radio" name="topic_t[2]" value="3" {if condition='isset($log.2) && $log.2.topic_v eq 3'}checked{/if} title="<em class='span'>$14,000,000 to reflect the investment in Chance only.</em>" ><br/>
                                                                        <input type="radio" name="topic_t[2]" value="4" {if condition='isset($log.2) && $log.2.topic_v eq 4'}checked{/if} title="<em class='span'>$16,000,000 to reflect the investments in both Chance and Evers at cost.</em>"><br/>
                                                                            <input type="radio" name="topic_t[2]" value="5" {if condition='isset($log.2) && $log.2.topic_v eq 5'}checked{/if} title="<em class='span'>$16,520,000 to reflect the investments in both Chance and Evers after adjusting for Rosemeade's share of both companies' Year 1 net income and dividends.</em>" ><br/>
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                                                                                &nbsp;<br>
                                                                                Goodwill:<br>
                                                                                The amount reported for goodwill should be <span class="parent mbg far {if condition='isset($log.3)'}xbg{/if}">$1,900,000, which is the sum of the goodwill from the acquisition of Chance and the goodwill from the investment in Evers.</span>
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                                                                                                <input type="radio" name="topic_t[3]" value="1" {if condition='isset($log.3) && $log.3.topic_v eq 1'}checked{/if} title="<em>[Original text]</em> <em class='span'> $1,900,000, which is the sum of the goodwill from the acquisition of Chance and the goodwill from the investment in Evers.</em>" ><br/>
                                                                                                    <input type="radio" name="topic_t[3]" value="2" {if condition='isset($log.3) && $log.3.topic_v eq 2'}checked{/if} title="<em class='span'>$0 because a gain of $2,000,000 should be recognized from the acquisition of Chance.</em>"><br/>
                                                                                                    <input type="radio" name="topic_t[3]" value="3" {if condition='isset($log.3) && $log.3.topic_v eq 3'}checked{/if} title="<em class='span'>$400,000, to reflect the goodwill from the acquisition of Evers only.</em>" ><br/>
                                                                                                        <input type="radio" name="topic_t[3]" value="4" {if condition='isset($log.3) && $log.3.topic_v eq 4'}checked{/if} title="<em class='span'>$1,500,000, to reflect the goodwill from the acquisition of Chance only.</em>"><br/>
                                                                                                            <input type="radio" name="topic_t[3]" value="5" {if condition='isset($log.3) && $log.3.topic_v eq 5'}checked{/if} title="<em class='span'>$2,000,000, to reflect the goodwill from the acquisition of Chance only.</em>" ><br/>
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                                                                                                                &nbsp;<br>
                                                                                                                Noncontrolling interest:<br>
                                                                                                                The amount reported for noncontrolling interest should be <span class="parent mbg far {if condition='isset($log.4)'}xbg{/if}">$2,800,000 to reflect the portion of Chance owned by other investors. The noncontrolling interest related to the investment in Evers is not separately recognized; it is part of the investment in Evers reported on the consolidated balance sheet.</span>
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                                                                                                                                <input type="radio" name="topic_t[4]" value="1" {if condition='isset($log.4) && $log.4.topic_v eq 1'}checked{/if} title="<em>[Original text]</em> <em class='span'>$2,800,000 to reflect the portion of Chance owned by other investors. The noncontrolling interest related to the investment in Evers is not separately recognized; it is part of the investment in Evers reported on the consolidated balance sheet.</em>" ><br/>
                                                                                                                                    <input type="radio" name="topic_t[4]" value="2" {if condition='isset($log.4) && $log.4.topic_v eq 2'}checked{/if} title="<em class='span'>$0 because Rosemeade controls Chance.</em>"><br/>
                                                                                                                                    <input type="radio" name="topic_t[4]" value="3" {if condition='isset($log.4) && $log.4.topic_v eq 3'}checked{/if} title="<em class='span'>$3,500,000 to reflect the portion of Chance owned by other investors. Noncontrolling interest is not reported for the investment in Evers because Rosemeade does not have a controlling interest in Evers.</em>" ><br/>
                                                                                                                                        <input type="radio" name="topic_t[4]" value="4" {if condition='isset($log.4) && $log.4.topic_v eq 4'}checked{/if} title="<em class='span'>$5,000,000 to reflect the portion of Evers owned by other investors.</em>"><br/>
                                                                                                                                            <input type="radio" name="topic_t[4]" value="5" {if condition='isset($log.4) && $log.4.topic_v eq 5'}checked{/if} title="<em class='span'>$8,500,000 to reflect the portions of Chance and Evers owned by other investors.</em>" ><br/>
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                                                                                                                                                &nbsp;<br>
                                                                                                                                                Retained earnings:<br>
                                                                                                                                                The amount reported for retained earnings should be <span class="parent mbg far {if condition='isset($log.5)'}xbg{/if}">$10,560,000, which is the retained earnings of Rosemeade plus Rosemeade's share of the Year 1 earnings of Chance.</span>
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                                                                                                                                                                <input type="radio" name="topic_t[5]" value="1" {if condition='isset($log.5) && $log.5.topic_v eq 1'}checked{/if} title="<em>[Original text]</em> <em class='span'>$10,560,000, which is the retained earnings of Rosemeade plus Rosemeade's share of the Year 1 earnings of Chance.</em>" ><br/>
                                                                                                                                                                <input type="radio" name="topic_t[5]" value="2" {if condition='isset($log.5) && $log.5.topic_v eq 2'}checked{/if} title="<em class='span'>$0 because retained earnings is eliminated upon consolidation.</em>"><br/>
                                                                                                                                                                <input type="radio" name="topic_t[5]" value="3" {if condition='isset($log.5) && $log.5.topic_v eq 3'}checked{/if} title="<em class='span'>$10,000,000, which is the retained earnings of Rosemeade only.</em>" ><br/>
                                                                                                                                                                <input type="radio" name="topic_t[5]" value="4" {if condition='isset($log.5) && $log.5.topic_v eq 4'}checked{/if} title="<em class='span'>$10,140,000, which is the retained earnings of Rosemeade plus Rosemeade's share of the Year 1 earnings of Evers only.</em>"><br/>
                                                                                                                                                                <input type="radio" name="topic_t[5]" value="5" {if condition='isset($log.5) && $log.5.topic_v eq 5'}checked{/if} title="<em class='span'>$10,700,000, which is the retained earnings of Rosemeade plus Rosemeade's share of the Year 1 earnings of Chance and Evers.</em>" ><br/>
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                                                                                                                                                        <div><u>Inventory</u><br>
                                                                                                                                                            The amount reported for inventory should be <span style="color:#0000ff">$10,600,000 because Rosemeade will consolidate Chance and will report the investment in Evers using the equity method.</span><br>
                                                                                                                                                            &nbsp;<br>
                                                                                                                                                            Because Rosemeade acquired more than 50 percent of Chance's stock, Rosemeade and Chance must file consolidated financial statements. &nbsp;The consolidated balance sheet must include all of both Rosemeade's and Chance's assets and liabilities. &nbsp;The amount to be included for Rosemeade's assets and liabilities is their carrying value. &nbsp;However, the amount to be included for Chance's assets and liabilities is their fair value as of the date of the acquisition. &nbsp;The total amount to be reported as inventory is therefore the $6,000,000 carrying value of Rosemeade's inventory plus the $4,600,000 fair value of Chance's inventory, for a total of $10,600,000. &nbsp;Because Rosemeade acquired only 40 percent of Evers' stock, Rosemeade would not include Evers' inventory on the consolidated balance sheet. &nbsp;Instead, Rosemeade would use the equity method of accounting for its investment in Evers.<br>
                                                                                                                                                            <br>
                                                                                                                                                            <br>
                                                                                                                                                            <u>Investment in S</u><br>
                                                                                                                                                            The amount reported for Investment in S should be <span style="color:#0000ff">$2,000,000 to reflect the investment in Evers only.</span><br>
                                                                                                                                                            &nbsp;<br>
                                                                                                                                                            $2,000,000 is the amount paid for 40 percent of Evers' stock. &nbsp;At an ownership level of 40 percent, Rosemeade would use the equity method of accounting under which its investment in the Evers stock is simply recorded in an account called "Investment in S." &nbsp;Note that although Rosemeade also originally recorded its $14,000,000 investment in the Chance stock in the "Investment in S" account, this amount would be eliminated during the process of consolidating Rosemeade's financial statements with Chance's. &nbsp;Also, the Investment in S account would not be adjusted for Rosemeade's share of the Year 1 earnings of Evers or Chance because Rosemeade did not acquire the investments in Evers and Chance until December 31, Year 1.<br>
                                                                                                                                                            <br>
                                                                                                                                                            <br>
                                                                                                                                                            <u>Goodwill</u><br>
                                                                                                                                                            The amount reported for goodwill should be <span style="color:#0000ff">$1,500,000, to reflect the goodwill from the acquisition of Chance only.</span><br>
                                                                                                                                                            &nbsp;<br>
                                                                                                                                                            The correct amount to be reported as Goodwill is $1,500,000. &nbsp;This is calculated as follows:<br>
                                                                                                                                                            &nbsp;
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                                                                                                                                                                        <td style="width:324px">Purchase price of Chance's stock:</td>
                                                                                                                                                                        <td style="text-align:right; width:150px">&nbsp;</td>
                                                                                                                                                                        <td style="text-align:right; width:150px">$14,000,000</td>
                                                                                                                                                                    </tr>
                                                                                                                                                                    <tr>
                                                                                                                                                                        <td style="width:324px">Divided by percent acquired:</td>
                                                                                                                                                                        <td style="text-align:right; width:150px">&nbsp;</td>
                                                                                                                                                                        <td style="text-align:right; width:150px"><u>.80</u></td>
                                                                                                                                                                </tr>
                                                                                                                                                                <tr>
                                                                                                                                                                    <td style="width:324px">Extrapolated fair value for 100% of Chance's stock</td>
                                                                                                                                                                    <td style="text-align:right; width:150px">&nbsp;</td>
                                                                                                                                                                    <td style="text-align:right; width:150px">$17,500,000</td>
                                                                                                                                                                </tr>
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                                                                                                                                                                    <td style="width:324px">Less:</td>
                                                                                                                                                                    <td style="width:150px">&nbsp;</td>
                                                                                                                                                                    <td style="width:150px">&nbsp;</td>
                                                                                                                                                                </tr>
                                                                                                                                                                <tr>
                                                                                                                                                                    <td style="width:324px">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Fair value of Chances' assets:</td>
                                                                                                                                                                    <td style="text-align:right; width:150px">20,000,000</td>
                                                                                                                                                                    <td style="text-align:right; width:150px">&nbsp;</td>
                                                                                                                                                                </tr>
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                                                                                                                                                                    <td style="width:324px">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Fair value of Chances' liabilities:</td>
                                                                                                                                                                    <td style="text-align:right; width:150px"><u>(4,000,000</u>)</td>
                                                                                                                                                                <td style="text-align:right; width:150px">&nbsp;</td>
                                                                                                                                                                </tr>
                                                                                                                                                                <tr>
                                                                                                                                                                    <td style="width:324px">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Fair value of Chances' net assets:</td>
                                                                                                                                                                    <td style="text-align:right; width:150px">&nbsp;</td>
                                                                                                                                                                    <td style="text-align:right; width:150px">(<u>16,000,000</u>)</td>
                                                                                                                                                                </tr>
                                                                                                                                                                <tr>
                                                                                                                                                                    <td style="width:324px">Goodwill</td>
                                                                                                                                                                    <td style="text-align:right; width:150px">&nbsp;</td>
                                                                                                                                                                    <td style="text-align:right; width:150px">$1,500,000</td>
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                                                                                                                                                            <br>
                                                                                                                                                            Note that the excess of the purchase price paid for Evers' stock over the fair value of Evers' net assets is not included in goodwill. &nbsp;Under the equity method, this excess is included in the Investment in S account and is not separately recognized (just as none of Evers' other assets or liabilities are explicitly included in the assets and liabilities reported on Rosemeade's balance sheet).<br>
                                                                                                                                                            <br>
                                                                                                                                                            <br>
                                                                                                                                                            <u>Noncontrolling interest</u><br>
                                                                                                                                                            The amount reported for noncontrolling interest should be<span style="color:#0000ff"> $3,500,000 to reflect the portion of Chance owned by other investors. &nbsp;Noncontrolling interest is not reported for the investment in Evers because Rosemeade does not have a controlling interest in Evers.</span><br>
                                                                                                                                                            &nbsp;<br>
                                                                                                                                                            Noncontrolling interest must be recognized because Rosemeade owns 80 percent of Chance, but it recognizes 100 percent of the assets and liabilities of Chance at fair value on the consolidated balance sheet. &nbsp;The correct amount to be reported for noncontrolling interest is $3,500,000. &nbsp;This is the $17,500,000 fair value of Chance (calculated above) multiplied by the noncontrolling interest percentage of 20 percent:<br>
                                                                                                                                                            &nbsp;<br>
                                                                                                                                                            $17,500,000 x 20% = $3,500,000<br>
                                                                                                                                                            &nbsp;<br>
                                                                                                                                                            Note that noncontrolling interest is not reported for Rosemeade's investment in Evers' stock. &nbsp;At an ownership level of 40 percent, Rosemeade would use the equity method for its investment in Evers. &nbsp;Under the equity method, Investment in S only includes the value of the actual percentage of stock acquired, not the value of 100 percent of the stock. &nbsp;Because the Investment in S account only includes the value of the stock actually acquired, there is no need to report a noncontrolling interest when using the equity method.<br>
                                                                                                                                                            <br>
                                                                                                                                                            <br>
                                                                                                                                                            <u>Retained earnings</u><br>
                                                                                                                                                            The amount reported for retained earnings should be <span style="color:#0000ff">$10,000,000, which is the retained earnings of Rosemeade only.</span><br>
                                                                                                                                                            <br>
                                                                                                                                                            The correct amount to be included in retained earnings is $10,000,000, which is Rosemeade's retained earnings balance. &nbsp;The stockholder equity accounts of subsidiaries, like Chance, are eliminated when consolidating. &nbsp;And, since Rosemeade is using the equity method for its investment in Evers, the only effect on Rosemeade's balance sheet from its investment in Evers is the $2,000,000 included in Investment in S. &nbsp;Also, the investments in Evers and Chance were made on December 31, Year 1, so Rosemeade has no share in the Year 1 earnings of either company.</div>
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